I finally sold my position in Green Mountain Coffee Roasters(GMCR) after having approximately quadrupled my money since my early-2008 purchase. I figure the latest episode of strength following announced price increases for K-cups, and the possibility of correction, gives me a good opportunity to cash in and reassess the situation from the sidelines. What's interesting about this whole episode is not so much that it was a successful investment (I've had more than enough good and bad rides to know better than to crow about any individual success story) but how crazy it seemed to many on day one, considering that I'm a value investor at heart. So what the heck was I doing buying a stock like Green Mountain in the first place, which had a PE (based on trailing 12 month EPS) a little above 60 when I made my purchase? I could easily argue that everybody needs to take a flier on a "fun stock" every now and then and for me, Green Mountain would certainly have fit the bill. An office I worked in back in the early 2000s had a Keurig single-serve coffee maker and used Green Mountain K-cups. I loved the coffee. I loved the flavor variety. Most of all, I loved the convenience (no messy clean-up) of the Keurig machine. When Green Mountain eventually acquired Keurig, it caught my attention. I continued to watch the company from afar, and then up close after I bought (and still make daily use of) a home Keurig machine. That's all well and good for doing the Peter Lynch thing (finding investment ideas based on your day-to-day life). But we still had those crazy valuation metrics, and these things are important to me. (I loved leading Internet stocks as much as anyone back in 2000, but I didn't plunge in.) The issue here, and this is where so many value investors go astray, is not how much you pay for a stock but what you get for your money. This is so obvious and easy to grasp outside the stock market. Would you expect to buy a new fully-loaded BMW for $20,000? Do you think you could get dinner in a 5-ster restaurant for $20? A lot of value literature uses logic that suggests you should pass on the BMW or the meal if you can't get prices like those. During my tenure as a Green Mountain shareholder, sales rose from $300 million (that being the trailing-12 month level at the time of my purchase) to $1.2 billion and EPS grew at a compound annual rate of about 60%. The latter means that when I bought the stock, I was getting a PEG ratio of 1.00 which, from a value standpoint, is fine. The problem is that I didn't know at the time I'd see a 60% EPS growth rate. Actually, I still think there are many untapped opportunities ahead for the company in terms of selling Keurig equipment and distributing K-cups for itself and other brands. It's really hard to put a number on expectations like these. That sounds like heresy in the investment world, where we have ratios for everything and discounted cash flow models that project cash flows out five or ten years, etc. and if we really want to get mathematical we can get into things like Markov process, Brownian motion, etc. (Don't ask; you don't want to know; trust me on this!) All I could really do when I bought Green Mountain was consider the opportunities that seemed ahead and ask myself if I thought they could amount to enough to allow my investment to work. I didn't need to get a 60% EPS growth rate. PEG ratios in the 1.5 to 2.0 range are often fine, especially for growth companies. So all I really needed was to if the company could achieve a growth rate of at least 30% (that would have brought my time-of-purchase PEG to 2.00). But wait: there was also plenty of margin for error. I'd still have felt good about my Green Mountain trip even if the price at which I sold today was in the mid-20s rather than the mid-30s. So I could have got by with a growth rate below 30% and a PEG ratio below 2.00. Given my assessment of Green Mountain's prospects, and my comfort with the company's financial viability, this investment seemed almost a no-brainer, even on the basis of value. This is something to think about next time a commentator cavalierly brushes aside something like Apple (AAPL), Amazon.com (AMZN), Google (GOOG), and so forth based on valuation. I'm not saying you should run out and buy these stocks, although in a recent post, I did point out that Apple investor could live with the stock even if iPad falls short of world domination. What I am saying is that any consideration of their valuations must be inextricably tied to an assessment of what you'd be getting for your money (i.e., growth prospects). You do this sort of evaluation when you consider cars. You do it when you consider a fine restaurant. Don't turn this all this off when you look at a stock. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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